loan
A sum of money borrowed that is expected to be paid back with interest.
Example
“He took out a personal loan to cover the cost of car repairs.”
Memory Tip
A LOAN is something you're lent. You borrow it and must return it.
Why It Matters
Understanding loans is crucial because most people will borrow money at some point in their lives, whether for a home, car, education, or business. The terms of a loan, including interest rates and repayment schedules, directly affect how much you will actually pay back and your overall financial health.
Common Misconception
Many people think that the interest rate on a loan is the only cost they will pay, but loans often come with additional fees, origination charges, and prepayment penalties that can significantly increase the true cost of borrowing.
In Practice
If you borrow $10,000 at a 5 percent annual interest rate over 5 years, you will pay approximately $1,328 in interest charges, meaning your total repayment will be $11,328. This shows how a seemingly reasonable interest rate can add substantial costs to the original amount you borrowed.
Etymology
From Old Norse 'lan' meaning 'thing lent' — something temporarily given to be returned.
Common Misspellings
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Related Terms
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